This is my first post. I have been reading the great forums in the last few days and have got some basic ideas about how to structure the finance. There are a few things that I still don't fully understand and I am hoping you finance gurus can explain more for me. I better use an example for my question:
PPOR
Value: $500,000
Original Loan (Loan A): $300,000 – secured by PPOR
Offset account links to Loan AI have read suggestions here that, to use the equity in PPOR for purchasing IP, it is better to get a new LOC and use the money in LOC as deposit for new IP:
PPOR
Value: $500,000
Original Loan (Loan A): $300,000 – secured by PPOR
Offset account link to Loan A
LOC (Loan
: $100,0000 (assuming 80%) – secured by PPORIP (deposit is paid from Loan B account)
Value: $500,000
Investment Loan (Loan C): $400,000 – secured by IPMy question is, if I apply a topup ($100,000) for the Original Loan (Loan A) and then use the topup money that is available in Loan A now as deposit for new IP. Isn't this money also tax deductible? And the new Loan for IP (Loan C) is still only secured by IP. Would really appreciated if someone could explain the problem of this structure to me?
PPOR
Value: $500,000
Original Loan (Loan A): $300,000 + topup $100,000 (topup money is in the same account) – secured by PPOR
Offset account links to Loan AIP (deposit is paid from Loan A account)
Value: $500,000
Investment Loan (Loan C): $400,000 – secured by IPThanks in advance
SydneyRentalauhealth wrote:PPOR
Value: $500,000
Original Loan (Loan A): $300,000 – secured by PPOR
Offset account link to Loan A
LOC (Loan: $100,0000 (assuming 80%) – secured by PPOR
IP (deposit is paid from Loan B account)
Value: $500,000
Investment Loan (Loan C): $400,000 – secured by IPWhat you have done here is correct and fine- just keep this way of investing the same for Loan C.
So really EVERYTIME you want to invest into a new property; create a WHOLE new LOC /loan – like what you did in the above example.Most home loans allows up to 5 splits.
auhealth wrote:My question is, if I apply a topup ($100,000) for the Original Loan (Loan A) and then use the topup money that is available in Loan A now as deposit for new IP. Isn’t this money also tax deductible?
If it’s a “TOP UP” on your original loan A (PPOR) – then you would have contaminated the loan- as part of the funds is personal and part ( 100,000) is now investment also.
Remeber ATO only looks at the purchase of the fund, not what it’s secured by.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Thanks you for answering my question.
For the TOP UP option, I still don't understand what you meat by contaminated the loan. In Loan A, $100,000 is used for investment (for purchasing IP), so the interest paid for that portion should be tax deductible. Is that correct?
Hi,
Well if i understand your question right.
this is what it seems like your doing when you say “TOP UP”
–Before top up—
PPOR worth: $500,000
Loan $300,000 ( Loan A) — secured by PPOR—-After top up—
PPOR worth: $500,000
Loan $300,000 + $100,000 ( Loan A) — secured by PPORThe $100,000 top up used for investment??
If this is what you mean by top up then it is contaminated ,
Happy to explain more- feel free to post away.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
That is the part I am confused. What I meant is after top up, the bank increases the loan amount from $300,000 to $400,000 for Loan A (PPOR). The increased $100,000 aomunt in Loan A is available for me to redraw and used as deposit for IP. Is this a problem from ATO's point of view?
Absolutely a problem!
When you look at your bank statment it will say for example:
18/8/2011
Mortgage repayment –$2,000
18/8/2011 —- Interest paid $1,600etc… Now remember you can only claim the interest part back for Investment loans only; so how can you declare and separate which part of the
$1,600 is for the PPOR or IP???Yes you may say, pro-rated it ..so 1/4 is IP —- $1,600 x 1/4- NOT THAT SIMPLE.
1. over time, you may deicide to pay extra into the account- so how can you decide then the % of ownership? it will get very complex
2. Your accountant is not gonna like it….ATO is not gonna like it- to much guess work, and complex.Regards,
Michael
Mick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Michael,
Thank you for the explanation. Now I can see the problem. So if the loan is interest only, and as you guys suggested, never pay extra into the loan. the extra money will alway goes to the offset account, is it still accaptable to claim 1/4 of the interest paid for the whole loan tax deductible in ATO's view?
Another one problem I can see now is the offset is not just for not-deductible one, but also for deductible one, which is really not a good idea. Is my understanding correct?
Regards,
SydneyRentalHi SR
The ATO apply the "Purpose Test" irrespective of the security used to obtain the loan so as i have posted many times before you could secure the new sub loan of $100K on the security of a pogo stick and if the funds were to be used for investment the interest would be deductible.
You would link the offset account to the non deductible debt portion of the PPOR loan and then have your income and IP rents etc paid into the offset account. Have the monthly interest for the sub loan and the separate Investment loan debited from this account. This way you will maximise the number of days you are haviing funds sit in the offset account saving you interest.
There is a big difference between an offset account and a redraw so be careful that your mortgage broker knows the difference to avoid the contamination Michael is referring to.Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
auhealth wrote:Michael,Thank you for the explanation. Now I can see the problem. So if the loan is interest only, and as you guys suggested, never pay extra into the loan. the extra money will alway goes to the offset account, is it still accaptable to claim 1/4 of the interest paid for the whole loan tax deductible in ATO's view?
Another one problem I can see now is the offset is not just for not-deductible one, but also for deductible one, which is really not a good idea. Is my understanding correct?
Regards,
SydneyRentalYou would want to save interest on your non-deductible loan before the deductible to increase your tax deductions.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Qlds007 wrote:Hi SRThe ATO apply the "Purpose Test" irrespective of the security used to obtain the loan so as i have posted many times before you could secure the new sub loan of $100K on the security of a pogo stick and if the funds were to be used for investment the interest would be deductible.
You would link the offset account to the non deductible debt portion of the PPOR loan and then have your income and IP rents etc paid into the offset account…
Richard/Terryw,
Thank you for replying.
Without splitting the PPOR loan, can I link the offset account to the non deductible debt portion?
I haven't touched the $100K since I applied for the TOP UP. The money is still in PPOR loan with the original $300K. Is there a way to fix the problem, or it is too late besause the money has been contaminated? Can I now ask bank to split the PPOR loan into two (one for $300K and one $100K) before I take the next step to use the $100K for investment?
Regards,
SydneyRentalHi SR
I just read the whole thread now.
What you have done is increase an existing loan. You will the use part of the loan to invest and will result in a mixed loan. There is nothing wrong with this and the interest will be deductible. If you have a $400,000 loan with $100,000 used for investment then 1/4 of the interest would be deductible.
BUT, problems will arise when you make payments to this loan. Assume you want to pay $1000 extra repayment above the interest. Because it is a split loan then 1/4 of this repayment will need to come off the investment portion and 3/4 off the PPOR portion. This is not ideal as you will be losing tax.
There is a way out though. The ATO will allow the split loan to be refinanced into separate portions, see TR 2002/2 para 18.
http://law.ato.gov.au/atolaw/view.htm?docid=TXR/TR20002/NAT/ATO/00001Once you do that then get the offset on the PPOR loan A, Loan B will be IO for $100k and loan C new 80% loan for new purchase.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Your situation can be reversed; just get the bank to reserve the steps and organise a new loan to be set up.
Regards
MichaelMick C | Shape Home Loans
http://www.shapehomeloans.com.au/
Email Me | Phone MeSame Banks. Better Rates. Served With a Passion.
Boys beat me to a response comes of being 9 hours behind in the UK for the next month or so.
As Michael mentioned your Broker or Bank should be able to sort out the split for you.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi, guys
Thank you so much for helping me understand the problems and providing me the solution. I understand that one mistake I make now may cost me thousands in the future. Just wanna make sure that I do it right and advice from experienced investors are the best!
I need to talk to the bank to rearrange me loans first as you guys recommended.
Best regards,
SydneyRentalHi Sydney
Why not give Michael a call and get him to do it for you as he is Sydney based.
Think i would prefer to trust Michael to get it done right for you rather than your Banker.Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
: $100,0000 (assuming 80%) – secured by PPOR
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